Joy camera plans to expand to the European market. The company considers buying Enola Plc, a privately owned company headquartered in the UK. The EBIT (earnings before interest and taxes) for Enola Plc. is expected to reach $17.5 million at the end of next year. The company’s EBIT is projected to grow at 8.5% per year for the next five years before reaching a stable long-term growth at 3% indefinitely. The net working capital, capital expenditures, and depreciation as a percentage of EBIT are expected to be 10%, 12.5%, and 9%, respectively. Enola has 2.5 million shares outstanding.
Joy camera has a total debt outstanding of $270 million with a YTM (yield to maturity) of 6%. The company has total market capitalization of $585 million with the required return on equity of 12.5%. Enola Plc. currently has a total debt outstanding of $75 million. The tax rate for both companies is 21%.

a. You currently work at Goldman Sachs and as a lead analyst and you’re tasked to perform a fair valuation of Enola’s stock price. Based on the above information, what is the maximum share price that Joy camera should be willing to pay for Enola?
b. After examining your analysis, the CEO of Joy camera thinks that it is more appropriate to estimate the terminal value based on EV/EBITDA multiple instead of perpetual growth rate. Assume that the appropriate EV/EBITDA multiple is 8, calculate the maximum shares price of Enola Plc based on this updated assumption.

Show workings and calculations

Answer rating: 100% (QA)

a The following is the valuation of Enola Plc using the DCF m... View the full answer